PACE leaves your current tax revenues intact.
Property Assessed Clean Energy (PACE) financing is an economic development tool that does not subtract or redirect a political subdivision’s existing tax revenues. Many economic development tools provided under Ohio law focus on abating or redirecting tax revenue through some form of public-private partnership. For example, a community reinvestment area (CRA) abates taxes on new improvement value, and tax increment financing (TIF) redirects increases in real property tax away from normal recipients and toward payment of public infrastructure improvements. While CRAs and TIFs can be indispensable tools for economic development, PACE provides a helpful alternative for municipal corporations and townships that want to incentivize development without interfering with current tax revenues.
PACE financing offers attractive rates and terms because special assessments provide security.
PACE provides developers access to financing on better terms than other sources of financing, like junior or mezzanine debt and partnership equity. To access those attractive terms, the property owner needs to accept annual special assessments sufficient to cover PACE financing payments. The PACE financing proceeds must be used to pay for energy efficiency improvements (a statutorily defined term found under R.C. 1710.01(K)). By leveraging the security of special assessments, PACE financing enables new sources of capital on better financing terms. PACE financing requires public-private cooperation between an owner, a capital provider, a municipal corporation or township, and an energy special improvement district (ESID).[1] To levy the special assessments used to secure PACE financing, municipal corporations or townships must create or join an ESID. The ESID then collaborates with the property owner on a plan for an energy efficiency project. The property owner adds the property to the ESID, and the municipal corporation or township levies special assessments on the property in installments large enough to repay the PACE financing. PACE financing can be provided either by a public entity, including by issuing bonds, or a private entity.
The Ohio market’s wide variety of PACE deals shows the flexibility of PACE in addressing developers’ various financing needs.
Although PACE financing must be spent on energy efficiency improvements, PACE is otherwise quite flexible in how it can be structured and what types of commercial projects it can finance. Below are three examples that help demonstrate the various ways PACE financing can be useful to developers:
- Refinancing of Construction Costs– of Hyatt House hotel: Approximately $17.7 million PACE financing provided by PACE Loan Group in 2024 to help refinance construction costs of a 136-room Hyatt House hotel and attached medical rehab annex in West Chester, Ohio. The $17.7 million in PACE proceeds went towards refinancing existing debt and completing construction of the property. Momentum on the project had previously stalled in 2021 due to the COVID-19 pandemic.
- New Construction – of Cobblestone Hotel: Approximately $2.1 million PACE financing provided in 2023 by PACE Equity to help finance the new construction of an 80-room Cobblestone Hotel in Bellefontaine, Ohio. The energy efficiency improvements financed by the $2.1 million in PACE proceeds are anticipated to lower expected utility spending by 30%.
- Renovation – of the Toledo Museum of Art: Approximately $24 million in PACE bonds were issued in 2024 to help finance the renovation of the Toledo Museum of Art as part of a joint effort among three port authorities, including the Columbus-Franklin County Finance Authority (CFCFA), the Toledo-Lucas County Port Authority (TLCPA), and the Cleveland-Cuyahoga County Port Authority (CCCPA). By partnering with each other, the port authorities increased their local capacity to invest and brought the project within risk tolerances. The TLCPA contributed $11 million, and the CFCFA and CCCPA committed $6.385 million each, for a total investment of almost $24 million in PACE bonds. This project demonstrates the possibility of cross-jurisdictional efforts to finance important historical structures within an Ohio city.
Only current or past-due PACE financing payments have a higher lien status than senior lenders, meaning PACE only minimally increases senior lenders’ exposure on a deal.
A common concern among developers considering PACE financing is how the senior lender on the deal will feel about special assessments being layered into the capital stack. Every senior lender worries about maintaining the first priority of their loan. Due to this concern, it is standard operating procedure in most PACE deals to obtain the lender’s consent and explain to them how PACE special assessments are not as threatening as they may first appear.
Importantly, it is not the entire amount of the PACE financing that enjoys a lien status equal to the state’s lien for real property taxes and therefore higher than mortgages upon the sale of the property. Only currently due or past-due special assessments (and not future installments of special assessments) have a lien status senior to mortgages upon sale. In the overall math of a deal, those current or past-due installments contribute relatively little to a senior lender’s overall exposure on a transaction.
Both political subdivisions and private developers should keep PACE financing front of mind as they pursue their goals.
If you are a municipality or township, consider PACE as another tool in your economic development toolbox, one that might be especially relevant if you feel your community has maxed out its capacity for TIFs, CRAs, or other more traditional economic incentives. If you are a developer, consider PACE financing as a source of relatively cheap capital that can supplement a gap in your capital stack. PACE financing has grown into an established industry of experienced professionals and tried-and-true systems that make it accessible to political subdivisions and developers of all kinds.
[1] See R.C. Chapter 1710.
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